Review

• KLK’s 1QFY17 results came in within ours and consensus full-year estimates. Reported net profit decreased by 3.8% QoQ mainly driven by the recognition of a lumpy deferred tax assets of RM268.0mn in 4QFY16 (relating to the revaluation of biological assets by certain plantations subsidiaries in Indonesia).

• Excluding the forex impact and other non-core items, 1QFY17 core net profit amounted to RM385.1mn, accounting for 33% of ours and consensus full-year estimates. If we exclude the deferred tax impact, the core net profit would have been increased by 13% on QoQ basis. While on YoY comparison, core net profit increased by 76.3% mainly due to higher CPO and palm kernel (PK) prices.

• Plantation: Operating profit increased by 90.1% QoQ to RM422.3mn, underpinned by higher FFB production as well as higher selling prices of CPO (+8.9% to RM2,720/tonne) and palm kernel (+12.0% to RM2,364/tonne). Meanwhile, the operating profit was also lifted by higher contributions from refineries and kernel crushing plants. FFB production grew by 16.3% QoQ to 1mn tonnes. While on YoY basis, FFB and rubber production dropped by 1.0% and 11.4%, respectively.

• Manufacturing: 1QFY17 operating profit increased by more than 100% QoQ to RM38.9mn, mainly attributed to lower derivatives loss and higher contribution from the oleochemical segment. However, margin remained reedy due to rising raw material costs and sluggish demand during the quarter. On YoY basis, operating profit dropped by 71.0%.

• Property: Revenue reduced by 0.6% QoQ to RM60.2mn while operating profit dropped by 15.9% YoY to RM15.6mn.

• No dividend was declared for the quarter under review.

Impact

• Earnings forecasts for FY17-FY19 were revised upward by 1.2%-3.6%, respectively after updating FY16 figures and incorporating higher PK price.

Outlook

• Management guided that FFB production and stocks are expected to improve and these may all ease the current rally in CPO prices. However, the business performance of the oleochemical division is anticipated to be challenging in view of the continuing difficult market conditions, high raw material prices, margin pressure and intensifying competition.

Valuation

• We upgrade KLK’s TP to RM22.75 (previously RM21.12), based on SOP valuation. Our TP implies a CY17 PER of 20x. Our Sell recommendation on the stock remains unchanged due to pricey valuation and the risk of further margin compression in the oleochemical sub-segment.

• Potential re-rating catalysts for the stock include i) stronger-than-expected FFB growth, ii) improved margin, and iii) higher CPO prices

Source: TA Research - 15 Feb 2017